The effect of government debt on Uganda’s economic growth during the period 1990 – 2021

Abstract

The study examined the relationship between government debt and economic growth in Uganda over the period 1990-2021. The present study empirically examined the short run and long run effects of government debt on economic growth in Uganda using time series data obtained from the World Development Indicators of the World Bank for a period of 31 years i.e.1990 to 2021. The study is established on finding the long run and short run effects of both domestic and external debt on economic growth in Uganda and in an effort to achieve these specific objectives: To examine the effect of domestic debt on economic growth in Uganda. To examine the effect of external debt on economic growth in Uganda. (iii) To investigate whether there is a cointegrating relationship between government debt and economic growth. The study employed the Autoregressive Distributed Lag and the Bounds testing approach to cointegration to ascertain whether there is a level relationship as well as the short run and long run relationship between economic growth and the regressors. The dependent variable of this study, economic growth measured by LNGDP while the independent variables are tax rates, domestic debt, external debt and a set control variables including trade openness, interest rate and the population growth rate. Prior to the analysis of the ARDL model, the study employed both the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests to check for the stationarity properties of time series variables and the order of integration of the study variables as well as checking for the possibility of spurious regression. In the long run, both domestic debt and external debt are observed to have an insignificant influence on economic growth which means the government is losing a lot of money into debt servicing which would have been used to finance production and other sectors of the economy. Therefore, the government should resort to domestic revenue mobilisation through increased tax effort other than borrowing which is detrimental towards the economic growth of Uganda. As a limitation, the study wished to carry out a cross country analysis by using a panel data analysis so as to compare the findings amongst the various countries. However, due to the absence of data and the inconclusive evidence for Uganda’s case, the researcher was only limited to the effect of government debt on economic growth of Uganda.